Mr Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate 100 acres of land The irrigation system costs $70,000 Mr Agirich expects that the irrigation system will increase yield and thus operating receipts by $15,000 per year but it will cost $4,000 a year to pay for electricity, maintenance, and additional labor Mr Agirich plans on keeping the irrigation system for 4 years before replacing it with a new one and he thinks he can sell it for $50,000 at the end of 4 years Assume that the Mr Agirich expects that the inflation rate will be 4 and that operating receipts, operating expenses, and terminal value will increase at the rate of inflation (i e , operating receipts, operating expenses and terminal value are stated as real dollars, thus, you must convert them to nominal dollars) The bank has offered to lend Mr Agirich $60,000 The loan will be fully amortized at a 10 interest rate over six years (annual payments) Mr Agirich anticipates that his marginal tax rate over the next four years will be 20 The IRS will allow Aggie Farms to depreciate the investment using straight line over 10 years Mr Agirich requires at least a 13 pre tax, risk free return on capital and a 2 risk premium on projects of comparable risk to the irrigation system What is the accumulated depreciation over the four years ANSWER Select What is the after tax risk adjusted discount rate ANSWER Select What is the present value of the after tax net returns ANSWER Select What is the present value of tax savings from depreciation ANSWER Select) What is the annual loan payment ANSWER (Select) What is the loan balance at the end of the third year ANSWER Select) What is the tax savings from interest payments in the fourth year ANSWER Select What is the Net Cash Flow after debt flows at the end of the second year ANSWER Select Financial Feasibility is not a problem ANSWER Select

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Mr  Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate 100 acres of land  The irrigation system costs $70,000  Mr  Agirich expects that the irrigation system will increase yield and thus operating receipts by $15,000 per year but it will cost $4,000 a year to pay for electricity, maintenance, and additional labor  Mr  Agirich plans on keeping the irrigation system for 4 years before replacing it with a new one and he thinks he can sell it for $50,000 at the end of 4 years  Assume that the Mr  Agirich expects that the inflation rate will be 4  and that operating receipts, operating expenses, and terminal value will increase at the rate of inflation (i e , operating receipts, operating expenses and terminal value are stated as real dollars, thus, you must convert them to nominal dollars)  The bank has offered to lend Mr  Agirich $60,000  The loan will be fully amortized at a 10  interest rate over six years (annual payments)  Mr  Agirich anticipates that his marginal tax rate over the next four years will be 20   The IRS will allow Aggie Farms to depreciate the investment using straight line over 10 years  Mr  Agirich requires at least a 13  pre tax, risk free return on capital and a 2  risk premium on projects of comparable risk to the irrigation system  What is the accumulated depreciation over the four years  ANSWER  Select  What is the after tax risk adjusted discount rate  ANSWER  Select   What is the present value of the after tax net returns  ANSWER   Select   What is the present value of tax savings from depreciation  ANSWER   Select) What is the annual loan payment  ANSWER  (Select) What is the loan balance at the end of the third year  ANSWER   Select) What is the tax savings from interest payments in the fourth year  ANSWER   Select  What is the Net Cash Flow after debt flows at the end of the second year  ANSWER   Select   Financial Feasibility is not a problem  ANSWER   Select

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Mr. Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate

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Financial And Managerial Accounting For MBAs

Mr. Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate

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Financial And Managerial Accounting For MBAs

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